Costly Price Adjustment and Automated Pricing: The Case of Airbnb: An Abstract

On many e-commerce platforms such as Airbnb, StubHub and TURO, where each seller sells a fixed inventory over a finite horizon, the pricing problems are intrinsically dynamic. However, many sellers on these platforms do not update prices frequently. In markets where sellers have fixed inventories and limited selling time, optimal prices respond to both the remaining inventory and time (Gallego and van Ryzin 1994). Empirical studies (Williams 2018; Cho et al. 2018) examining pricing problems in these environments also support Gallego and van Ryzin’s (1994) theoretical prediction. However, on many e-commerce platforms where small sellers are facing a fixed inventory and limited selling time problem, we commonly observe price rigidity, which seems to contradict Gallego and Ryzin’s theory.

Automated pricing, which uses machine learning algorithms to automatically price products, is becoming a standard feature on some of these platforms. One key feature of automated pricing is that it reduces the seller’s burden; the seller does not need to carry out a price-optimization problem every day. This paper develops a dynamic pricing model to study the revenue and welfare implication of automated pricing, which allows sellers to update their prices without manual interference. The model focuses on three factors through which automated pricing influences sellers: price adjustment cost, buyer’s varying willingness to pay and inventory structure. In the model, we also take into account competition among sellers.

Utilizing a unique data set of detailed Airbnb rental history and price trajectory in New York City, we find that the price rigidity observed in the data can be rationalized by a price adjustment cost ranging from 0:9% to 2:2% of the listed price. Moreover, automated pricing can increase the platform’s revenue by 4.8% and the hosts’ (sellers’) by 3.9%. The renters (buyers) could be either better off or worse off depending on the length of their stays.